In 2018, Gartner made a bold and alarming prediction: By 2030, 80 percent of heritage financial firms would be out of business.1 The research firm attributed these anticipated closures to digitalization, with businesses that fail to embrace digital transformation losing market share to “global digital platforms, fintech companies and other nontraditional players”. Since then, the COVID-19 pandemic has accelerated the adoption of online banking and digital payments, reducing many consumers’ dependence on cash and traditional brick-and-mortar banks.
However, the digitization of the global financial system does not necessarily translate into cash becoming obsolete in the near term, nor does it spell imminent doom for banks. By embracing technological advances to enhance their products and services and improve consumer experiences, banks can transform their business models to thrive in the digital age. Those that evolve their branch models and strike a balance between physical and digital will continue to play an important role in their communities and the global economy at large.
Digital transformation of the banking industry is long overdue
The financial industry is undergoing a sweeping transformation due largely to changing expectations and preferences among consumers. In the wake of the COVID-19 pandemic, business consulting firm Kearney2 predicted one-quarter of Europe’s 165,000 bank branches would be gone in three years.3 As consumers use cash and checks less frequently, their need for traditional banking services associated with those payment methods declines, while their desire for digital options increases—both of which have implications for banks.
In some cases, shifts in consumer demand have led to branch closures. The National Community Reinvestment Coalition reported a 5.13-percent loss of bank branches in the United States between 2017 and third-quarter 2020.4 However, some of these closures reflect large national chains correcting for overcapacity in their branch networks or shifting their geographic footprints in response to demographic changes or other developments. Since the COVID-19 pandemic, the places where people spend time5 have shifted: For example, due to the rise in remote work, people in the US are spending more time at home and less in the workplace; many are spending more time in parks and less on public transit. These shifts, particularly if they persist after pandemic restrictions have lifted, will influence where banks locate their branches.
Within both new and established bank branches, digital transformation is inevitable—and well underway. One reason is that younger generations of bank customers do not expect to stand in line at a branch to deposit a check or exchange large cash bills for smaller ones. Seventeen percent of teenagers have never been in a physical bank, and one-third do not have a bank account.6 And yet, among young people who do use banks, physical channels are still an important part of their experience. Recent research found that 72 percent7 of Generation Z consumers visited a bank branch at least once a month. Despite speculation around the concept of a “cashless society”, physical currency and banks are not in danger of extinction due in large part to their critical roles in the global financial system.
Banks (and cash) are crucial elements of society and the global economy
Some would say the traditional bank branch is a thing of the past. While the number of branches has decreased, having a physical presence is critical. We’re seeing an evolution to smaller, more efficient branches combined with advanced self-service technology. The key is providing choices by integrating digital and in-person banking journeys, allowing consumers to transition seamlessly between mobile apps, automated teller machines (ATMs), virtual bank tellers and more.
Banks provide valuable services to small and medium businesses (SMBs), which, in turn, represent a significant growth opportunity for retail banks and credit unions. More than 90 percent of global businesses are SMBs, and they account for more than half of all global employment.8 These enterprises can generate profound positive effects in their surrounding communities; according to the International Monetary Fund (IMF), improving financial inclusion for SMBs in the Middle East and Central Asia could boost economic growth by up to 1 percent and lead to 16 million new jobs by 2025.9
Another continued driver for branch necessity is the persistent demand for cash. Visa recently stated during their third-quarter 2021 earnings call that the dollar amount of cash withdrawn from ATMs was 98 percent of 2019 levels. Access to cash is essential for many segments of the world’s population who still rely on it—low-income families, the elderly, migrant communities and others—so maintaining efficient cash infrastructures and processes is critical.
In addition, the banking sector provides more than 90 percent of financing in developing countries and more than two-thirds globally.10 Funding from financial institutions can shape the future of a country or region.
Technology enables banks to embrace their core purpose
Consumer frustration with outdated banking processes can obscure the important role financial institutions play in society. Banks that have failed to adapt to today’s technology can be difficult to work with, costly to manage and inaccessible to consumers who demand digital solutions. But banks that embrace technology in the service of their core purpose—to enable access to vital capital that helps individuals, families, businesses and communities thrive economically—will continue to be pillars of their communities. A global survey found that 93 percent of respondents reported having moderate or complete trust in their banks.
While digital payments and other technology are gaining momentum, customers often prefer to visit a branch in person to access wealth-management guidance, resolve complex problems or manage their business accounts. Prior to the coronavirus pandemic, two-thirds of new bank accounts were opened at physical branches. That being said, the way consumers interact with bank branches is changing. Innovative technology such as video tellers, ATMs that allow customers to specify the cash denominations they prefer and even cashless branch locations can help banks create a richer experience and meet customers’ evolving expectations. As consumer behaviour continues to evolve, banks that reimagine how new digital tools and in-branch experiences can truly work together, partner with fintechs (financial-technology firms) and invest strategically in technology will position themselves for growth rather than obsolescence.
Contrary to popular belief, digital transformation will not be the death of banks. Rather, technology is becoming the lifeblood of financial services, empowering banks to be customer-centric, innovation-minded and perhaps, most importantly, future-proof.
1 Gartner: “Gartner Says Digitalization Will Make Most Heritage Financial Firms Irrelevant by 2030,” October 29, 2018.
2 Kearney: “New decade, new crisis: European Retail Banking Radar.”
3 Wall Street Journal: “European Banks Use Pandemic to Clean House,” Patricia Kowsmann and Margot Patrick, February 14, 2021.
4 National Community Reinvestment Coalition: “Bank Branch Closures Continue At Alarming Pace,” December 14, 2020.
5 Google: “COVID-19 Community Mobility Report,” July 23, 2021.
6 Cash Matters: “Teenagers love cash, finds National Financial Awareness Day Survey (JA USA, 2019).”
7 CNN: “Exclusive: Why Millennials and GenZers love going to the bank,” Matt Egan, November 20, 2019.
8 The World Bank: “Small and Medium Enterprises (SMEs) Finance.”
9 International Monetary Fund: “Financial Inclusion of Small and Medium-Sized Enterprises in the Middle East and Central Asia,” Nicolas Blancher, No. 19/02, 2019.
10 United Nations: Secretary-General: “Secretary-General’s remarks at launch of ‘UN Principles for Responsible Banking’,” September 22, 2019.